Tata Communications on Thursday announced the sale of a 74 per cent controlling stake in its data center operations in the India and Singapore.Deepali Gupta&Arijit Barman | ET Bureau | May 20, 2016, 08:56 IST

With a new, deep pocket, strategic partner in place, Tata Communications plans to further grow the data centre businesses in India and Singapore in the fast growing Asia Pacific region.

"The multi-pronged strategy behind this partnership is about growth," said Rangu Salgame, CEO Growth Ventures of Tata Communication in an interview with ET.

"We have made significant investments and have taken the business to a significant scale and have gained undisputable market share. Now this joint venture gives us an opportunity to grow further with a new partner ST Telemedia on one hand and on the other use part of the cash proceeds to partially pare down our debt and improve the consolidated balance sheet. At the same time, we can also use the cash to reinvest in innovation around our managed services portfolio," he adds.

Tata Communications on Thursday announced the sale of a 74% controlling stake in its data center operations in the India and Singapore, two of its most significant markets. The transaction values the business in these two jurisdictions, often labelled as its crown jewels, at Rs 4130 crore ($616 million). The Tatas will retain a 26% stake.

India and Singapore put together operates 17 of the total 44 data centers that Tata Communications operates. In 2014, the Indian data centre business was transferred to a wholly-owned subsidiary Tata Communications Data Centers Private Ltd (TCDC) through a court approved process.

These centres - with a footprint spanning across Delhi, Mumbai, Bengaluru, Chennai, Kolkata, Hyderabad and Pune - currently service a highly-diversified customer base, including blue chip enterprises in Asia, e-commerce platforms and global multi-national corporations.

"The cash proceeds from this deal (divestment of 74% stake) will translate to around Rs 3056 crore ($456 million). We haven't yet decided how to break that up for debt repayment, product innovation and future capital expenditure. The revenue from these centres stood at around $150 million. Over and above, there are additional revenues for services generated which Tata Communications will retain," explained Salgame.

The remaining 27 centres, including UK and US have not been bundled in the sale as the company has decided not to invest in these markets further. The Asia Pacific market, according to Salgame, has been growing at 20% year on year on the back of booming e-commerce, smart phone sales and mushrooming cloud networks. In India, the company has a 32-35% market share.

India is one of the fastest growing markets for cloud services in the world, estimated to grow from $423 million in 2013 to $1.3 billion in 2017, according to research firm Gartner.

This has attracted several large global players to corner the higher end of the market with premium services. Last year, Japan’s NTT opened its largest data centre in the country, its ninth so far, spread across 3 lakh sq foot in Mumbai. Microsoft too opened three data centres ahead of schedule in India, while global players like Amazon are also expected to expand its services soon.

Salgame however did not disclose the granular details about profitability or EBITDA margins that these operations in India or Singapore generate, only indicating macro trends. In established markets like US and UK, typically data centres enjoy 40% operating margins. the figure will be a lot less in emerging geographies like India which are still at an investment phase but is expected to grow "significantly from here."

India's expanding market warrants two or three more data centres every year with each center requiring investment of $50-75 million, Salgame said.

The consumption in the market is growing on account of an influx of smart phones, which would leapfrog data consumption on account on mobile apps and video downloads. More and more Indian enterprises will start adopting cloud services.

"With the digital explosion, e-commerce or media companies can ill-ford any down time on their sites. So their requirement for top quality servers and data centers is absolutely critical... And then in the future, you will see big data and Internet of things, looking at the trends this is just the beginning," feels Salgame.

The company also sees a new trend of demand originating from tier II cities from the current footprint of larger metropolitan centres. The top two or three premium providers will prevail with pricing power to attract businesses. "Then there will be fragmentation of the tail."